Australia: Funding Voidable Transaction Proceedings

In good news for liquidators, the Federal Court's decision in Marsden (liquidator) v CVS Lane PV Pty Limited Re: Pentridge Village (in which Dentons acted for the liquidator) confirms that time will be extended for liquidators who are unable to bring voidable transaction proceedings within the relevant timeframe due to a lack of funding.

The case also has wider implications. It could be relied upon by liquidators to justify subsequent claims which could otherwise have been brought at an earlier stage if funding had been available.

Extending time to bring voidable transaction proceedings

Proceedings brought by liquidators in relation to voidable transactions under s 588FF(1) of the Corporations Act must be brought:

  • within 3 years of the relation-back day (having regard to s 91); or
  • within 12 months of the first appointment of a liquidator,

whichever is later.

However, liquidators may apply to the court to extend time to bring voidable transaction proceedings.  The extension of time application must also be filed within the same time limits set out above.

In considering whether to extend time to bring voidable transaction proceedings, a court will generally consider:

  • the liquidator's explanation for the delay in bringing voidable transaction proceedings;
  • the merits of the foreshadowed voidable transaction proceedings; and
  • any prejudice that would flow from the extension of time.

Marsden v CVS Lane PV Pty Limited [2018] FCA 102

In this case, the liquidator made an application pursuant to s 588FF(3)(b) to extend the time to bring voidable transaction proceedings against three entities. This was to allow the liquidator time to conduct investigations, including public examinations of relevant personnel, in order to consider bringing voidable transaction proceedings.

The application was opposed by two entities against whom the liquidator had sought to extend time to bring voidable transaction proceedings. The primary argument in opposition to the application was that the liquidator had not sufficiently explained the delay in taking action.

Ultimately, the court was satisfied it was fair and just to extend time where the delay was sufficiently explained, the potential claims had sufficient merit, and the extension would not result in specific prejudice to the defendants.

Lack of funding: the real obstacle

The court found that "the real obstacle to progress has been the lack of funding" and that the lack of funding was a sufficient explanation for the liquidator's delay in taking action.

The court also found that:

  • a liquidator's explanation of delay must cover the whole of the liquidation, even where the liquidator making the application has replaced previous liquidators (especially where the previous liquidators were members of the same firm);
  • while the liquidator undertook significant unfunded work in this case, significant additional unfunded work would have been necessary in order for the liquidator to identify the potential claims earlier;
  • the liquidator was hampered by the lack of books and records of the company; and
  • the liquidator was not required to demonstrate that he had taken proactive steps to obtain funding in order to provide a satisfactory explanation for delay.

These findings are useful for any liquidator who is not properly funded to bring voidable transactions proceedings in time.

A lack of funding is generally a sufficient explanation for liquidators not taking steps which they could have otherwise taken if properly funded. This is consistent with s 545 of the Corporations Act (which was also referred to by the court in this case), which confirms that a liquidator is "not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property".

Considerations for liquidators contemplating voidable transaction proceedings

Liquidators should consider the following steps at an early stage:

  • Undertake and document at least some preliminary investigations with respect to any potentially voidable transactions.
  • Identify the relevant time period for bringing voidable transaction proceedings: 3 years from the relation-back day (which can be identified with reference to s 91 of the Corporations Act), or 12 months after first appointment of a liquidator, whichever is later.
  • If proceedings cannot be brought in time, the liquidator should consider seeking to extend time, noting the application to extend must be filed with the court within same time period: 3 years from relation-back day, or 12 months after first appointment of a liquidator, whichever is later.
  • If the liquidator is unfunded, consider taking steps to identify and engage with any potential sources of funding to bring voidable transaction proceedings or any application to extend the time to do so.
  • If there is any change in liquidator, a new liquidator should carefully review the files of the former liquidators to identify any potential voidable transactions, especially where a change in liquidator alone is unlikely to constitute a sufficient explanation for delay in bringing an application to extend time.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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